When asked, most CFOs will tell you they are involved in operations. But often such involvement is like having a second, lower-paying job: they feel they can’t afford to divert too much focus away from their top breadwinner.
Some finance chiefs see things differently, however. Jeff Richard, for example, is among a smallish cadre of CFOs who see operations not just as important, but as the defining element of their work. Such a focus turns on its head the oft-voiced notion that finance executives don’t actually create value.
“Do I close books? No. Am I a tax guy? Definitely not. Where I bring value is on the operations side,” says Richard, CFO at Safety-Kleen, a $1.3 billion environmental-services company and oil refiner that was purchased in October by competitor Clean Harbors.
“Operations is the key to everything,” says Larry Litowitz, finance chief at SECNAP Network Security, a secure Internet-services provider. “That orientation is found most at manufacturers, but it should be at every company.”
Increasingly, CFOs may find themselves taking on operational tasks whether they want to or not. At larger companies, the steady waning of the chief operating officer position has resulted in more operational responsibility for CFOs, recruiters say. In 2000, 47% of the 669 companies included in either the Fortune 500 or S&P 500 had COOs; in 2012, only 35% did, according to executive-recruiting firm Crist Kolder’s 2012 “Volatility Report of America’s Leading Companies.”
To CFOs like Richard, the trend is a good thing. Finance chiefs should “get out of the office and into the field,” he recommends.
Delivering the Goods
For example, they could ride along on a delivery truck. At his previous CFO job with Pavestone, a maker of segmented concrete products, Richard rode in a truck that made 16 deliveries to Home Depot locations over two days. He asked Home Depot department managers what Pavestone could be doing better, and they told him that Pavestone allowed them to order only full truckloads — a problem for them, since their incentive compensation was based partly on how many inventory turns they oversaw.
In particular, the managers said they were reluctant to order from Pavestone after August for fear of getting stuck with unmovable product. “There’s no way I would have known that if I was sitting in the corporate office,” Richard says.
In response, Richard revised delivery schedules, enabling Home Depot locations to get the same amount of product in two separate deliveries. “It took a bit more logistics, but it made them happy,” he says. That change had significant value: Home Depot was Pavestone’s biggest customer.
Richard uses a similar strategy as CFO at Safety-Kleen. For example, one of the company’s business units collects used oil from consumer oil-service operators like Jiffy Lube, Auto Zone, and Wal-Mart. When Richard rode in a truck with a 200-gallon tank, he saw that the tank was only a quarter or a third full after each stop. “That seemed inefficient,” he says. Richard says the drivers were filling up their tanks frequently so that supplier tanks would not overflow. (Overflow can be a significant problem for suppliers, because they have to close when their tanks are full.)
The solution was simple: Safety-Kleen put electronic monitors on the tanks so it would know when they were getting full and be able to route trucks there in time. The company also started an incentive-pay program for drivers based on gallons of oil picked up per mile driven.
There are many other ways for operationally oriented CFOs to gain insights into how to improve a company, Richard notes. Among them: work a shift on the manufacturing floor to see how products are created. Accompany marketing staff to trade shows, to learn more about customers and also scout M&A possibilities and product extensions. Visit the research-and-development lab to gain insight into product successes and failures, and even take a stab at creating a product yourself.
Operationally minded finance chiefs are almost surely most prevalent at manufacturing companies, because someone bending a bar or sewing a garment is quite visible, says CFO Litowitz. For other companies, like SECNAP Network Security, processes are less tangible. “It’s more difficult to understand what someone is doing when pressing keys on a keyboard,” as in software programming, he says.
CFOs at companies with less visible processes can tap into their operational side by studying the steps it takes to develop an end product, such as a new piece of software, says Litowitz. For example, if a company is creating software to alert diners when their table is ready, a developer first must understand how diners wind up at a table: the host greets them, puts them on a list, and crosses off the names of seated parties, while another employee informs the host as tables become free. Only then can developers produce specifications for that process, “which is no different from creating specs for bending metal to make parts for a blender,” says Litowitz.
Litowitz took this approach as finance chief for a maker of educational software. The firm’s new releases tended to have multiple bugs, and he led an effort to find out why. He discovered that putting so many features into a new release often meant that each feature could not be satisfactorily tested. In turn, the company decided to modify release dates when necessary. Each feature was thoroughly tested before it was included in the software, even if that meant postponing its release.
Litowitz says CFOs can influence operations at a range of companies, including service-oriented businesses. “It’s really no different. The work is a set of activities,” he insists. For example, during a financial audit, an accounting firm analyzes each section of a company’s balance sheet and income statement to determine how much time the work will take to complete and then create an estimate of the client’s audit costs.
During the work, the team keeps time records to compare against the estimate in order to bill for extra work and to learn how to improve the audit the following year. “All these activities can be analyzed, controlled, and measured against a predetermined standard,” says Litowitz. And just as on a manufacturing floor, efficiency generates profit, justifying the CFO’s involvement.