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TECHNOLOGY
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Posted by David Rosenbaum | CFO.com | US
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February 8, 2012 8:30 AM ET
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Everywhere one turns these days, one hears about Big Data, Business Intelligence (BI), and analytics, and ways in which they can be consolidated through new technologies to grant businesses the god-like ability to peer into the very souls of their customers (by reading their Twitter feeds, Facebook postings, and even logging their mouse movements), optimize every business function under the sun, and allow financial planners to run so many "what if" scenarios in their FP&A processes that for every question the future may pose -- strategic or operational, micro- or macroeconomic -- the right answer will come running, eager to present itself.
Sounds too good to be true, doesn't it?
Well, it probably is.
"Strategies," cautioned balanced scorecard guru and Harvard Business School Professor Robert Kaplan at last week's CFO Corporate Performance Management Conference in New York, "are executed by people, not spreadsheets, not BI software."
In other words, like all tools, the new tools being developed to power the data-driven enterprise will only be as useful as the skills, wisdom, and experience of the people and businesses that use them can make them.
For example, toward the end of 2000, Cisco (then Cisco Systems), peered into its demand forecasting engine, applied the algorithms that had never been wrong, and decided that what it needed was more inventory -- more switches and routers -- to sate the appetite for its equipment that had led to more than 40 straight quarters of growth and powered the dotcom boom.
Unfortunately for Cisco, even as it upped its orders to its network of suppliers, and even as it filled its warehouses, its customers had begun to dial back as they saw what Cisco did not: the dotcom bubble bursting.
As 2000 turned into 2001, as Cisco's switches and routers moldered in their warehouses, the company's stock plummeted; it lay off 8,500 workers; it wrote-off $2.2 billion in inventory. Between March 2000 and March 2001, its market cap went from $430 billion to $180 billion. Some of Cisco's problems could be attributed to a lack of visibility into its supply chain, but it also badly misjudged the market. Why couldn't Cisco see what others saw? Because its corporate eye was fixed on its demand model, on its algorithms, not on the real world. A similar story could be told about the 2007 credit crisis in which investment banks believed their own risk models rather than the very real risk of billions of dollars in assets weighing on their balance sheets. What would Cisco and the banks have answered when asked, as the late, great Richard Pryor asked his wife when she discovered him in bed with another woman, "Who are you gonna believe? Me, or your lying eyes?"
As new BI and analytics tools not only come onto the market but become cheaper and more accessible thanks to the software-as-a-service (SaaS) delivery mechanism, it's important for CFOs, who increasingly will be making the call on the adoption of these technologies, to remember that IT is an enabler, not a driver of business success. Big Data, we're told, can tell you everything about anything. But as MIT senior lecturer and author (Islands of Profit in a Sea of Red Ink) Jonathan L.S. Byrnes suggests, "The more data and analysis that is available, the more important it is to whittle it down."
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TECHNOLOGY
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Posted by David Rosenbaum | CFO.com | US
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February 3, 2012 9:57 AM ET
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Before I joined CFO last year, I was working from home. (All right; I was unemployed.) In those relatively dark days, I was always logged onto Facebook. Alone in my attic office, trolling the Internet for work, sending out my CV, rarely receiving a response, hectoring editors for payment for services rendered, learning a hard lesson about how companies could augment their cash flow by not paying me expeditiously, Facebook provided the cheery, bright community I'd lost when I lost my job.
Today, gainfully employed, surrounded by living, breathing people, I almost never open Facebook. I visit my LinkedIn groups; I keep TweetDeck rolling on my desktop; but Facebook, not so much. And when I do, I don't like what I see: Suggestions that I friend people who know people I know and therefore could in some alternative universe be my friends. (They're not and won't be.) Ads trying (as they say) to induce me to spend money I don't have to buy stuff I don't need to impress people I don't know. A feed keeping me updated on all the things people are "liking" moment by moment.
If you ask me, it's not cool, and, as Napster wild child Sean Parker (Justin Timberlake) said in "The Social Network," "The Facebook is cool. That's what it's got going for it. You don't want to ruin it with ads because ads aren't cool."
Of course, that's fiction. That's screenwriter Aaron Sorkin talking, not Sean Parker, and certainly not Facebook founder Mark Zuckerberg, who resisted monetizing Facebook in the movie but in this week's pre-IPO S1 filing reported $3.7 billion in revenue last year, 85% of it from third-party advertising.
That's good money. And over a billion of it was profit, which is pretty remarkable, if not unique, for a technology IPO. So, I'm sure the fact that I've effectively dropped out of Facebook doesn't particularly discomfort Zuckerberg. I mean, as of December 31 he had 845 million monthly active users and so, as he's poised to become one of the world's wealthiest men, losing little old me can't be particularly troubling. On the other hand, in the aforementioned S1 filing, the very first risk the company lists is "If we fail to retain existing users or add new users, or if our users decrease their level of engagement with Facebook, our revenue, financial results, and business may be significantly harmed."
And that's the catch, isn't it? To return value to its multitude of would-be investors, Facebook will have to grow revenue by increasing the amount of money advertisers spend with it. To do that, it has to grow its user base ("If we are unable to maintain and increase our user base and user engagement, our revenue, financial results, and future growth potential may be adversely affected.") But can Facebook make itself more attractive to advertisers while remaining attractive to users?
It won't be easy. In fact, it may be impossible. All those ads; all those wheedling come-ons to connect and invite others to connect, it's a turn-off.
In fact, it's uncool.
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RISK MANAGEMENT
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Posted by Norman Marks | CFO.com | US
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February 2, 2012 2:26 PM ET
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While the heads of internal audit usually don’t report directly to CFOs, they do look to finance chiefs for leadership. Best practice is for the head of internal audit (also called the chief audit executive, or CAE) to report functionally to the audit committee and administratively to a top executive, usually the CFO. This preserves the independence between the two functions and creates an unusual but important relationship.
Last month, I wrote about what the CFO should expect from the head of internal audit. This time, I will look at what the CAE should expect from the CFO. These traits include:
Honesty: I put this first because it is the most important attribute the CFO should expect from the CAE, and it is essential to an effective working relationship built on mutual trust.
Information and inclusion: One of the most significant challenges for the CAE is understanding what is happening within the organization, including its objectives, strategies, and plans; the management team’s concerns and priorities; and the company’s current performance and outlook. As CAE, I can focus the audit work on the key areas only when I understand what issues are important to the company and its more significant risks. As mentioned last week, the CFO and CAE share a desire for the organization to succeed, and every CAE welcomes being included when information is shared among the senior leaders of the organization.
Support: The CFO is the first person the CAE will turn to when concerns are raised over the adequacy of internal controls and the management of risks. Although the CFO may not be the “owner” of all internal controls, the CAE generally looks to him or her as the champion within the executive management team.
A mentor: There are two aspects to this. The first is the ability of the finance chief to help the CAE navigate through and be effective in discussions with top management, including the CEO. Although CAEs should have direct access to the CEO, they don’t have the same relationship with the chief executive as the CFO does -- and could always use advice on how to tackle sensitive issues. The second is the ability of the CFO to coach me and help me improve. Although I may report directly to the audit committee, the CFO should play an important part in assessing my performance and contributing to its improvement.
I also expect the CFO to support the internal audit function, including the provision of necessary resources. But internal auditors know that is not a given. They have to earn the finance chief’s support by providing valuable assurance on governance, risk management, and internal control processes, along with recommendations that improve their effectiveness.
Norman Marks CPA is a vice president with SAP and a long-term internal audit and risk-management practitioner.
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TECHNOLOGY
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Posted by David Rosenbaum | CFO.com | US
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February 1, 2012 2:59 PM ET
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At this week's CFO Corporate Performance Management Conference in New York, Jonah Keri, author of 2011's The Extra 2%: How Wall Street Strategies Took a Major League Baseball Team from Worst to First, told how the Tampa Bay Rays managed to reach the playoffs three out of the last four years with one of the lowest payrolls in baseball. Keri's message was that one could optimize performance without large investments by being smarter and using data to drive decision making.
According to Keri, the Rays plumbed the statistics to discover what really produced wins in order to exploit market inefficiencies in much the same way Michael Lewis famously described Oakland A's general manager Billy Beane doing in 2003's Moneyball.
The A's, like the Rays, were one of baseball's have-nots, with far less money to play with than did the Yankees or Red Sox. In Beane's case, the market inefficiency he and his data analyst, Paul DePodesta, discovered was the overvaluing of raw talent (potential) and the undervaluing of production (a history of success). Therefore, Beane eschewed drafting high school kids in favor of college players with a record of achievement that allowed him to forecast performance at the big league level. They focused on signing (at a discount) players baseball looked down upon (guys with bad bodies, bad wheels, and suspect arms) but who had demonstrated an ability to get on base,the sine qua non of scoring runs. But by the time Keri begins his story with the 2008 Rays, the market had adjusted and everybody was looking for fat, slow players who could get on base. Consequently, the Rays looked for a differentiator and found it in defense, building their ballclub around players who could catch and throw. This, Keri claims, is what enabled the Rays to leverage their limited resources and go from losing 96 games in 2007 to winning 97 in 2008 and going to the World Series.
In his CPM presentation, Keri distilled the Rays experience down to several maxims: process is more important than outcomes as processes are sustainable while results can be fickle (the Rays have never actually won a World Series; neither have the Beane-led A's); trust the data not the common wisdom (statistics showed Mike Mussina, a righty, killed left-handed hitters so Rays manager Joe Maddon, defying hundreds of years of baseball thought, loaded his lineup with righties and pounded Mussina); size doesn't matter, nimbleness does.
All this is no doubt true, but . . .
The only reason the Rays made the playoffs last year is because the Red Sox (with baseball's third largest payroll) choked like dogs. The Rays, once they got into the tournament, were dispatched by the Texas Rangers, a team with double their payroll. The Rangers were beaten in the World Series by the Cardinals, a team with a payroll higher than theirs. In fact, over the last 10 years, the only team to win a World Series with a payroll in the bottom half of the league was the 2003 Marlins (ranked 25th).
Yes, results are fickle; the World Series is a small sample of games, and performance can improve by being smarter and nimbler. But let's not forget that brute resources are also a differentiator and, intelligently applied, a very powerful one.
Of course, resources can also be wasted foolishly and disastrously. Just ask a Mets fan.
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HUMAN CAPITAL
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Posted by David McCann | CFO.com | US
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January 30, 2012 3:28 PM ET
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Once upon a time I managed a staff of writers. They traveled a lot. I approved their expense reports. But apparently not with my eyes too wide open. Years later I ran into one of those folks, who couldn?t keep from bragging that he?d gotten me to approve a credit-card expense for a nonbusiness activity that?s illegal in 49 states. I?d have been OK living out my days without having heard about that.
The point here is that you guys are CFOs. The bucks stop with you. How many of you sign off on employees? expenses with your eyes snug behind a glaze of impatience and boredom? If you pay attention, you might see some interesting stuff. To paraphrase the late, great Art Linkletter, employees say the darndest things (on their expense reports).
On this topic, Robert Half Management Resources recently interviewed 1,600 U.S. and Canadian CFOs from a stratified random sample of companies with 20 or more employees. I know finance types are conservative, but they seem excessively touchy about some of the items they report showing up on expense reports.
For example, many tsk-tsk at reimbursing for no-no ?personal? items like cigarettes, toilet paper, hot-tub supplies, and even golf clubs. Well, who am I, and more to the point who are you, to say those were illegitimate? These expenses sound to me like they supported some innovative client-entertainment initiatives.
Annoyed at the employee who billed the company for cosmetic surgery? Where?s the vision? Could have been a customer-acquisition and retention play. Obviously.
Requesting reimbursement for automotive faux pas, like speeding tickets or a fine for crashing into a tollbooth, is also frowned upon. But what about all the times employees arrive at work or client sites with their vehicles and driving records intact? What do you say then, huh? Why do you have such a negative attitude?
What about those claims for celebrations, like a wife?s anniversary gift and dinner out, that make some of you so unhappy? Come on. The employee would almost surely be less useful with a frying-pan-shaped dent in his skull, let alone an actual frying pan embedded there.
Paying to replace a lost phone? Duh. The guy lost it at work. Hotel charge for viewing adult movies? Hey man, you?re the one who sent him on the road. It?s stressful out there. A claim for something that had already been expensed and reimbursed? Ok, ok, you can have that one. Just thank your lucky stars that so far you?ve gotten away scot-free with all those unfairly denied reimbursements for legitimate expenses.
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Video
