It is the CFO’s responsibility to ensure that a project starts only after adequate analysis of delivered value. Because part of the CFO role is to bridge numbers and value, a CFO that loses sight of value gives up control and can create a serious power imbalance that may damage the relationship with the rest of the company.
Classic project evaluation rules favor calculation of the net present value (NPV) of any given project to estimate how that project will contribute to the value of a company. From a mathematical perspective, it is a fairly simple task that most people can easily do, and popular spreadsheets have built-in formulas supporting the calculations. The difficulty is not the arithmetic, but the ability to predict and evaluate the impact of a project and express it as a financial measurement.
Imagine a situation where an organization is about to start competing with banks by delivering a particular service 30% cheaper. NPV, and indeed most analyses, would fail to acknowledge that the banks can — and would — fight back, and that the lifespan of the service would be limited.
Some of the key variables to determine value will not be known in advance, and therefore it is necessary to assume their value. It is vital to make those assumptions explicit for the sake of further project verification. For example, answer questions such as, “Is it still on track? Has the environment changed?” The knowledge resulting from this analysis should be widely distributed among the project team so each team member is equipped to raise a hand if something unexpected happens.
A short, correctly structured meeting is enough to clarify what is known, unknown, and what needs to be researched. It may turn out that the market has yet to be created, in which case there is no way of estimating the NPV, and the company has to accept this project as an experiment and be ready to lose the entire investment.
Successful project analysis starts with the realization that projects are not homogeneous and there is no point in analyzing them as a whole. Projects consist of components; some of those components have a well-established presence in business, are widely adopted, and offer predictable value. Conversely, others have just emerged and bring a lot of potential for the future, but also bring risk because of their unclear current value.
A correlation becomes visible between how widespread the adoption of a given component is, how much value that component brings, and the uncertainty associated with it. And if you inspect how components help to deliver the final value of the project, you will find some components are more important than others. You will also find which components are used in more than one project, which will affect your budgeting approach.
Having introduced a method of assessing project risks and potential rewards (through uncertainty-market maturity correlation), you can use that knowledge to prioritize intentional experimentation before larger projects are launched or to cancel them early if the risk is too high. Visualizing the project through a range of tools such as value chain diagrams or Wardley Maps can help even more in breaking large projects into small, manageable parts and identifying the uncertainty associated with them.
This process creates high situational awareness — you learn what will be done, cost structure, and key risks. Situational awareness helps different teams make decisions, plan or test marketing campaigns, research relevant legal cases, or even cancel the project if it does not build enough value for the organization. It also allows for better allocation of resources since teams can focus on added value and avoid work that is duplicated across multiple initiatives.
The process of identifying key project stakeholders, making them identify components and their characteristics, and exposing their assumptions should be embedded into the corporate culture.
The CFO, through a spend control mechanism, can ensure that key uncertainties and assumptions will be exposed before projects above a certain threshold are approved. It is in the company’s best interest for the CFO to exercise this power because it is a unique opportunity to understand the value of projects, not just their financial aspects.
Power stems from control over rare assets, regardless of what those assets are — finances, authority, knowledge. Not knowing or not understanding what is happening in your immediate environment is a big risk. It is not enough to be a financial expert, or any expert whatsoever, unless that expertise is put to work for the benefit of the organization. The willingness to learn and extract knowledge outside of our primary domain and comfort zone is one of the key aspects that makes us powerful enough to live up to our responsibilities.
Chris Daniel is a consultant at Leading Edge Forum.