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Posted by David Rosenbaum | | US
February 15, 2012 3:10 PM ET
Last night, New York Knicks guard Jeremy Lin hit a three-point shot with under a second to play to lift the Knicks to a win over the Toronto Raptors -- the Knicks' sixth straight, the last five with Lin starting. In each of those games, Lin scored over 20 points, becoming the first NBA player in history to do so. Since Lin began starting for the Knicks on February 5, Madison Square Garden (MSG), the team owner, has seen its stock rise 13% and its market cap increase $227 million. According to investment site Seeking Alpha, Lin's emergence "may actually add a lot of long term value to the company's stock price." Plus, since Lin entered the starting lineup, traffic on and has increased more than 550%, reaching 4.7 million page views, the highest week-to-week increase in the site's history. Before Linsanity began, Lin was the very definition of an NBA nobody. Undrafted, he was signed by Oakland's Golden State Warriors last year, saw little playing time, and was sent down to the D-League (the NBA's minors) three times. He was waived by the Warriors and picked up by the Houston Rockets. They released him. He was signed by the Knicks last December and relegated to the bench. The Knicks reportedly considered cutting him before February 10 when his contract (the league minimum for a second-year player) would become guaranteed. The obvious question is why? Why did no one in Oakland or Houston or even New York see that Lin could play? At 6 feet 3 inches, he's not short. At 200 pounds, he's not small. But he is Asian-American, and there are no Asian-Americans in the NBA. So when coaches looked at Lin, they saw "Asian," and that did not translate to "player." Also, Lin went to Harvard. The last NBA player from Harvard was Ed Smith in 1954 (thank you, Wikipedia). When coaches looked at an Asian-American from Harvard, they couldn't see that he could shoot, pass, and dribble rather well. They were blinded by prejudice. Prejudice is a business risk. Had injuries not forced the Knicks to start Lin, MSG's market cap would not be what it is today, and its shareholders would not be enjoying their windfall. Here's another form of prejudice and another business risk. A Pew study of long-term unemployment reports that in the last quarter of 2011 "more than 42% of unemployed workers older than 55 had been out of work for at least a year, a higher percentage than any other age category." The obvious question, again, is why? People over 55 can shoot, pass, and dribble rather well. But when businesses see people over 55, they don't fit their preconceived notion of what a new hire should look like. I was out of work from the beginning of 2008 until CFO hired me last spring. During that time, I applied for scores of jobs for which I was well-qualified; I was interviewed dozens of times. Invariably, someone younger than I (I'm now 62)got the gig. Meanwhile, the flow of articles mourning the retirement of the baby boomers -- and the impact their loss will have on businesses -- is unabated. A recent Financial Times article, for example, cited research finding that a shortage of managerial skills due to boomer retirement already was adversely affecting organizational performance. There are people out there who can help your business if you open your eyes. Don't miss your own version of Linsanity.
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How Smart Is Business Intelligence?
Posted by David Rosenbaum | | US
February 8, 2012 8:30 AM ET
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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Confessions of a Facebook Drop-Out
Posted by David Rosenbaum | | US
February 3, 2012 9:57 AM ET
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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What Does Internal Audit Expect from the CFO?
Posted by Norman Marks | | US
February 2, 2012 2:26 PM ET

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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The Real Moneyball
Posted by David Rosenbaum | | US
February 1, 2012 2:59 PM ET
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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