Finance Brings Value Discipline to Strategy Execution

Interesting comments from Costco's CFO Richard Galanti in the report "Finance Brings Value Discipline to Strategy Execution: Different Paths to One Truth" from CFO Research Services, in collaboration with Deloitte Consulting LLP:

“We tend to be arrogantly simple.” When planning a new store, Costco is willing to trade off academic sophistication in favor of practicality. He explains, “We use a very basic cash-on-cash, return-on-investment calculation. One might argue that the rate in a new market should be a little different from that in an existing market, where we have a high degree of predictability. But from our viewpoint, keeping it simple is more important.”

"… No matter who you are in the company, one-fifth of your bonus [is tied to] inventory shrinkage. Low inventory shrinkage indicates a clean operation because shrinkage is not just pilferage. It includes things that are damaged, get stale, or lost. It can be caused by paperwork problems in accounting due to discrepancies between the actual shipments and billings. So low shrinkage is indicative of a clean operation in our mind, from many operating perspectives.”

“We’re not going to explain the capital asset pricing model to a buyer … We try to keep things basic and simple—much like our business itself. We sell 4,000 items, not 200,000 items. We don’t advertise. We cut out a lot of the complexities of the retail business and by cutting out those complexities and those costs, we can sell goods at prices lower than anybody else out there—and that’s what makes us successful.” So instead of explaining arcane financial economics, Galanti reduces things to the essential elements that managers need to execute strategy effectively. For example, reduction of inventory shrinkage through theft, loss, or paperwork inconsistency is a metric that goes into the incentive pay of everyone eligible for a bonus. The beauty of the metric, Galanti says, is that everyone can do something to influence it. Buyers can make sure that easyto- pilfer items arrive in hard-to-pilfer packages.Warehouse managers can minimize losses by running a tighter ship. Even accounting personnel can impact the metric by keeping a close eye on the paperwork.

Fun with trends, time-series and stats!

If you love trends and making sense out of statistics, check out Gapminder whose vision is “making sense of the world by having fun with statistics!” [via Google Blogoscoped]. Check out the Human Development Trends 2005 report that they have on their homepage.

They have collaborated with Google Co-op so you can add them to your subscribed links and your future Google results which have relevant keywords will also have a direct link to their charts.

Also worth checking out are Trendalyzer – free software that turns boring time series into attractive moving graphics – and interesting providers in the Google Co-op Directory whom you can subscribe to.

Incentivising employees to put theories into practice

“What do you think is a good incentive to help people think through theories that show evidence in practices or outcomes?” asks Dr. Ellen Weber of the Brain Based Business blog, commenting on my earlier post on talent management. From my experience (as a participant) in the talent management initiatives of some well-managed organizations, this is how I think the process can be formalized:

• Participants in a talent development course, say a 6-sigma course, are first asked to formally note down their understanding of the subject matter, say Quality Management and 6-Sigma concepts before attending the course.
• Before the course starts, they are to note down their expectations from the course and how they plan to translate it into results. For key courses / audiences, this could be quantified – say, in the number of hours or dollars they expect to save by using the inputs from the course.
• At the completion of the course, participants are to again note their key learnings from the course as also any additions / changes to the benefits they can think of having completed the course.
• These objectives can then be formally tracked at the completion of set timeframes, say 1 week, 1 month and 1 quarter from the completion of the course – how many objectives were practically achieved? Of the objectives that couldn’t be achieved, analyze the reasons for further process improvements.
• In the annual / periodic performance appraisals, track against each performance objective how much the courses attended earlier contributed. If possible, attach dollar values to the value added attributable to the courses.

Thus you have metrics to measure the benefits derived from each course as also a ranking of the attendees who were the best at putting the theories into practice – something which can be further incentivized in the form of recognition and/or rewards.

Online page design tips

Eyetrack has some interesting research findings and tips on Article-Level Page Design:

• When readers encountered a story with an introductory paragraph, 95 percent of them read all or part of the introductory paragraph.
• Those who spent time carefully reading the introductory paragraph of a story on article-level pages typically spent little time with the full story. Those who gave the intro paragraphs little time usually spent even less time with the story text.
• Shorter paragraphs encouraged testers to continue reading.
• Story text in one-column format was read more extensively than story text presented in a “newspaper-like” multiple-column format.
• Subheads in online stories had little affect on how much of the first or top portion of the story was read when the reader’s interest was strongest. However, subheads increased reading for “skimmers” and for those whose attention in a story was beginning to wane.
• When readers got to an article-level page, they seemed to be there to view the text. Overall, participants’ eyes fixated on the story or other text elements before the accompanying image.

They also have detailed results on everything from eye-viewing patterns to headlines and font size. Useful resource!

The disappearing mid-market

The Economist has a thought-provoking article on the "two most noteworthy trends among the swelling ranks of middle-class consumers around the world—trends that appear to be, at first glance, at odds with each other. These are the tendencies for consumers to be more cost-conscious; but simultaneously more willing to splurge money on luxury items." Key takeaways:

• Sales both at the top and bottom of the consumer market are rapidly growing while sales are being squeezed hard in the middle, though it is still the largest market segment in rich countries.
• One reason [for trading down] why this change has taken place is that the discount retailers have raised the quality of their products. A second development is the rapid increase in transparency in consumer markets, thanks not least to the internet.
• Americans, in particular, “have become addicted to the deal, which is leading them to do irrational things” … One consequence is that people buy lots of stuff they do not need … chiefly because it seems to be a bargain.
• Companies that get stuck in the mid-market may be doomed. But as businesses trading up clash with those trading down, some of them may end up as losers, too.

Recommended reading on this topic:

• "Trading Up" where Michael Silverstein and Neil Fiske explored half of the change, the phenomenon of the middle-class occasionally treating themselves to luxuries that they would once have regarded as unaffordable.
• "Treasure Hunt: Inside the Mind of the New Consumer" where Michael Silverstein and John Butman report on the other side of that coin, the popularity of trading down—hunting for basic goods at bargain prices, not least to generate the savings that can be lavished on the occasional luxury.
• "The Naked Corporation" by Don Tapscott and David Ticoll
• "Shopportunity! : How to Be a Retail Revolutionary" by Kate Newlin

The CEO’s role in talent management

The EIU published a report "The CEO’s role in talent management: How top executives from ten countriesare nurturing the leaders of tomorrow" in collaboration with Development Dimensions International (DDI). Key takeaways: 

• Good talent management is not undertaken in a piecemeal fashion but consists of comprehensive development programmes. These include the identification of leadership potential, performance evaluations, targeted development activities and job experience.
• Many CEOs mentor executives in their organisations—an additional and important part of the programme. They regard the development of the next generation of leaders as one of the best ways of leaving a strong legacy.
• Formal processes for identifying top talent, including performance evaluations, and strategic reviews of key talent should occur at least annually and incorporate written feedback to buttress scored categories.
• A varied business background is the best grounding for the CEO and COO roles. As today’s corporate leaders face such diverse challenges and opportunities, firms are looking for people with wide experience in terms of function, role, and, increasingly, geography. 
• Talent development programmes should combine both theory and practice in the form of structured learning experiences and off-site meetings, as well as the proper business experience. They should be supported on a daily basis by coaching and mentoring activity.

ATKearney FDI Confidence Index

Key takeaways from the ATKearney FDI Confidence Index 2005:

• India joins China at the center of the FDI radar screen. It also replaces the US as the 2nd most attractive FDI location.
• China dwarfs India in FDI, partly because China attracts more capital-intensive functions.
• Investor enthusiasm for China and India is at an all-time high.
• FDI prospects dim for Western Europe.
• Investment confidence soars for Eastern Europe.
• IT and contact centers remain the highest areas for corporate offshoring.
• Investors see diminished Macro risks, but growing Micro risks.

Enabling ICT for Rural India

While looking at the proceedings of FIRe (Future in Review), found the web-page for Rafiq Dossani who is doing ground-breaking research on IT as it relates to South Asia, and India in particular. Here is an excerpt from the Executive Summary of the project Enabling ICT for Rural India:

Some findings from the review were expected, such as poor infrastructure, high deployment and maintenance costs and the lack of content for eGovernance. Some less expected findings are that eGovernance services are overwhelmingly the most needed; that content is largely irrelevant to needs (itself indicative of wider problems of user and operator capabilities); but that user interest rises significantly when services can be delivered regularly and efficiently; that NGOs play a key role in understanding user needs and increasing awareness; and, finally, that rural capacity is not being enhanced through ICT.

Some problems exist because the strengths of the different stakeholders are not being used optimally. Thus, NGOs, which are strongest in understanding user needs and in increasing awareness, have diverted considerable resources to accessing bandwidth and paying for kiosk infrastructure. Organizations that are village-focused have missed the opportunity of maximizing coverage through Internet-based provision. All providers must deal with infrastructure problems outside their control, such as power problems. Partnerships in content provision are rare though greatly needed.

Our proposal for a new ICT model is based on separating the infrastructure from content provision and recommending that deployment of the infrastructure upto the block level be provided by technology specialists using universal service obligation (USO) funds. We also recommend the establishment of a data center at the state level in order to use content more efficiently. These approaches recognize the public-good character of the technology infrastructure. The Ministry of Rural Development and Panchayati Raj Institutions should create a framework of rules to enable state management of this process.

“Trying to predict what will happen by reading newspapers is like trying to drive while looking at the rear-view mirror.”

– derived from Ben Hecht

Finance outsourcing in the high-tech and electronics industries

Key Findings of an Accenture-sponsored survey conducted by the EIU looking into trends, risks and opportunities associated with finance outsourcing in the high-tech and electronics industries:

• Finance is among the most outsourced functions.
• Finance being outsourced by small and large firms at differing rates.
• Executives are satisfied with outsourcing arrangements.
• Barriers to increased finance outsourcing exist.

What are the primary benefits / objectives of outsourcing the Finance function?

• sharper focus on core competencies
• lower costs.

If you do not outsource finance and accounting functions but you do outsource in other areas of your business, please indicate why the finance function has not yet shifted to this model.
The finance functions are considered too critical tobe outsourced (54%)

What will be the primary drivers behind the increasing use of finance outsourcing in your industry?

• Improved quality of service from outsourcing providers (46%)
• Pressure on costs (49%)

In your own organisation, what are the barriers that stand in the way of a decision to outsource finance functions?

• Desire for greater direct control of finance functions (68%)
• Cultural resistance to change (42%)

In your view, what are the 3 primary risks associated with finance outsourcing?

• Risk that quality of service is inadequate (63%)
• Risk that in-house knowledge and expertise erodes beyond repair (42%)
• Risk of breaches of data security (41%)