For centuries, executives expertly managed the total productivity of tangible assets, such as plants and equipment. They monitored both efficiency and effectiveness because tangible assets, or “things,” historically accounted for more than 80% of business value.
But in the last 40 years, tangible assets have declined to 15% of business value, while intangible assets now generate 85% of value.
These are the job activities, or “tasks,” performed by knowledge workers. Formerly known as white-collar employees, these people now comprise a majority of the U.S. workforce. But accounting rules require their activities to be recorded as expenses. And executives currently manage those as costs to be contained and reduced. Productivity measures of efficiency and effectiveness are rarely applied.
That’s why the newest, most valuable business assets remain underproductive, performing far below their potential.
CFOs are ideally positioned to capitalize on this valuable opportunity. They can lead the transition from managing the productivity of “things” to managing the productivity of “tasks.”
White-Collar Assets: Underproductive “Competencies”
The composition of these intangible assets is not what you might think. Executives perceive them to be mostly patents, trademarks, and goodwill. But those are only 25% of the total. The other 75% are the job activities that economists call “competencies,” which generated more than 60% of S&P market value in 2015.
In business, competencies are concentrated in white-collar functions, recorded as selling, general, and administrative (SG&A) expense. Finance, R&D, and product engineering are competencies, as are the relationships between customers and suppliers (marketing/sales). Databases and information systems are also included (IT).
At first glance, it’s tempting to think that managing the productivity of intangible “competency organizations,” such as marketing or finance, is fundamentally different and more difficult than managing a conventional factory. But CFOs can adapt many of the methods honed over the past century in the course of successful tangible asset management. That’s because factories, as well as intangible assets, are managed with budgets.
The major difference between intangible asset budgets and factory budgets is that the latter are derived and evaluated with quantitative productivity measures.
Inefficiency: Adopt Productivity-Based Budgets
Knowledge workers squander an average of 40% of their typical work day performing avoidable tasks, such as error correction, rework, and over-service, our research shows. Without productivity management, these inefficiencies pass unnoticed and cause over-spending for costly knowledge work. This is how Fortune 500 knowledge workers squander 15% of hard-won earnings before they reach the bottom line, based on our experience and calculations using public data.
For example, the world’s largest lightbulb maker manufactures products in automated plants that are nearly labor-free. But when the bulbs are sold through the world’s largest retailer, the invoices are manually reconciled by knowledge workers, resembling a modern-day Dickensian counting house. A group of 2,000 employees who process invoices is supported by a team of 600 lower-cost reconcilers. They correct inconsistencies, contact store managers and vendors, and return goods. Vendors complain of their high costs, delays, and the inconvenience related to invoice processing.
Nobody at the retailer notices the wasteful rework, however, because the invoice-processing organization routinely meets its operating budget.
When CFOs help develop operating budgets for executives who manage tangible assets, such as factories, they begin with forecasts of productivity. Output volumes are estimated and applied to productivity metrics: cost per unit, labor efficiency factors for tasks, and cycle times for processes. Starting with productivity performance goals, they work backward to generate budget line items and totals. These are productivity-based budgets.
Consequently, many CFO organizations already possess the capability to manage the productivity of the intangible assets known as competencies. They can introduce productivity-based budgets to these knowledge work organizations at the simplest level. In the example above, the invoice-processing organization can be budgeted and managed starting with only two metrics: invoices processed and invoices that arrive “not-in-good-order” (NIGO).
Ineffectiveness: Manage the Root Causes of Results
It is impossible to reliably estimate the business value lost to ineffective knowledge work, but the results often appear as unintended consequences (direct losses) and opportunity costs (indirect losses). Most knowledge-work organizations incur both types of value losses.
The good news is that CFOs can adapt “root cause analysis” from their manufacturing colleagues to better manage the results of unintended consequences.
Consider a global credit card issuer that maintains an average backlog of more than 50,000 consumer claims. The company’s contact centers are flooded with customer demands for unfulfilled marketing campaign promises: bonus points, rebates, free gift offers. Most result from the marketing organization’s failure to coordinate the details of well-intentioned consumer campaigns with the company’s fulfillment operations capabilities and the requirements of its regulatory compliance organizations.
These are unintended consequences that generate substantial, direct costs of remediation. In fact, the high costs of remediation render more than 10% of the campaigns “business value negative” at the design stage, based on our analysis. These should never be launched. But because such costs fall in organizations other than marketing, such as customer contact centers, visibility is low and it’s considered business as usual.
However, the loss of business value is not limited to remediation costs. It includes greater losses of value, such as the continuous drag on marketing effectiveness and the ongoing erosion of the global brand.
Eliminate the remediation costs, and you also eliminate the brand erosion.
In the factory, industrial engineers document each step of production. They analyze the “root causes” and the interdependencies that result in consequences, both intentional and unintended. It is a ceaseless effort.
The CFO: Industrial Engineer of Intangible Value
Now that knowledge workers comprise the majority of employees in advanced economies, their costly, inefficient tasks are increasingly subject to external scrutiny. Activist investors have caught on. They want to simply downsize knowledge workers. And digital upstarts want to disruptively automate them away. But businesses and CFOs remain best positioned to capitalize on this growing class of undermanaged, intangible assets.
CFOs might even take a page from Henry Ford, a century ago, as the moving assembly line was being born. Keenly aware that the most valuable asset in the newly emerging plant was know-how, the company immediately built a dedicated office on the factory floor. It was devoted to documenting, standardizing, and distributing the rapidly growing body of knowledge — the competencies — essential for productively managing the massive investment in the tangible assets of automated plant and equipment. Those working in that office on the factory floor were the industrial engineers for tangible asset value.
Knowledge work today represents a similarly massive investment in intangible assets. CFOs should begin to think of their finance organizations as the industrial engineers of intangible asset value.
William Heitman is managing director at The Lab Consulting, which has been implementing non-technology business improvements since 1993.